Transparency International Guidance on Anti-Corruption and Anti-Bribery Due Diligence for M&A Transactions – Part I

Transparency
International (TI) recently released, in draft form for consultation, a
White Paper entitled "Anti-Bribery Guidance for Transactions." Although
this version was preliminary draft, available for a commentary period and the
final version is to be released later in October, 2011, the guidance provided
is well worth reviewing and will be of great use to any company engaged in
international transactions. We will therefore review this document over two
postings. In Part I, we will review the risks to companies involved in
international mergers and acquisitions. In Part II, we will discuss the due
diligence process suggested by Transparency International for such
transactions.

TheTI White Paper suggests that there are greater
forces driving compliance than simply compliance with anti-corruption and
anti-bribery laws such as the Foreign Corrupt Practices Act (FCPA) and UK
Bribery Act. A company engaging in an international acquisition should also
strive to avoid "the potential financial reputational damage that may come from
investing in or purchasing a company associated with bribery [or corruption].
TI suggests the following should be actively explored:

Has
bribery taken place historically?

Is
it possible or likely that bribery is currently taking place?

If
so, how widespread is it likely to be?

Does
the target have in place an adequate anti-bribery program to prevent
bribery?

What
would the likely impact be if bribery, historical or current, were
discovered after the transaction had completed?

Financial, legal or reputational risk can have a
significant impact the valuation or a transaction or its desirability. The
White Paper sets forth the following potential impacts for a purchaser or
investor of anti-corruption or anti-bribery risks during due diligence.

Legal Risk

Financial Risk

Reputational Risk

Current bribery and/or corruption in target company
discovered during transaction

High

High

Medium

Current bribery and/or corruption in acquired company
discovered in post-transaction

The White Paper lists some of the specific consequences
where investments are made in a company which has a history of bribery or
corruption.

Both
the target company and the acquiring company may place themselves (and
their respective Boards of Directors) at risk of criminal or civil fines
and penalties.

The
market value of the target company may be overstated and hence damage the
overall financial position of an acquiring company. Conversely, such
conduct may diminish the asset value and returns for a target company.

The
business instability brought by such conduct. This can include aborted
business deals where both sides work long and hard only to have the
transaction fall apart near the end of the process.

The
acquired business may not simply be dysfunctional but acquiring such a
business may also introduce a culture into the acquiring company which
will negatively impact it and bring about employee de-motivation.

Even
if there are no individual criminal actions brought against target or
acquiring company employees, there can be a long period of disruption due
to lengthy and costly investigations and the attendant reputational damage
and media attention.

However, the White Paper also speaks to several positive
benefits from appropriate due diligence. These include:

Management
quality indicator which will assess the positive qualities of the target
company, including the quality of the target's management and its overall
systems, including books and records. TI believes that the evidence from
due diligence of anti-corruption and anti-bribery programs is an indicator
of overall management quality.

The
mitigation benefits available if a bribery incident is discovered. Under
the UK Bribery Act, if a company has "Adequate Procedures" it may
have a defense to a claim of violation of the Act. Under the FCPA,
evidence of a best practices compliance program can be used in
mitigation of any alleged violation of the FCPA.

The
reputational gain which an acquiring company may be able to gain with
regulators or investors if it can show integrity and responsibility during
the due diligence process.

Lastly
an acquiring company can go a long way in meeting investor expectations in
the area of Environmental, Social and Governance (ESG) risks, which can
include corruption and bribery, during M&A transactions.

These factors listed by TI in its White Paper provide the
compliance practitioner strong ammunition when confronted with a management
which fails to understand the need for a robust due diligence in a mergers and
acquisition transaction. The White Paper does not focus on the regulatory
aspect but more on the market reasons for engaging in the appropriate
anti-corruption and anti-bribery due diligence. This White Paper continues the
trend which emphasizes the business reasons for compliance and we find it a
welcome addition to the vast TI store of White Papers and other guidance for
the compliance practitioner.

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